Taxation Law: Determining Taxable Income and Deductible Expenses

This report provides a detailed analysis of taxation law, focusing on the determination of ordinary income under Section 6-5 of the ITAA 1997 and allowable deductions under Section 8-1 of the ITAA 1997. It addresses issues related to taxable income derived from personal exertion and allowable ded...Read More

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

1TAXATION LAW
Table of Contents
Answer to question 1..................................................................................................................2
Heading:.....................................................................................................................................2
Issues:.........................................................................................................................................2
Rule:...........................................................................................................................................2
Application:................................................................................................................................5
Conclusion:................................................................................................................................8
Answer to question 2:.................................................................................................................8
Heading:.....................................................................................................................................8
Issues:.........................................................................................................................................8
Rule:...........................................................................................................................................8
Application:..............................................................................................................................10
Conclusion:..............................................................................................................................13
Reference List:.........................................................................................................................14

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Answer to question 1
Heading:
The problem here is based on the determination of the ordinary income under the
provision stated under the “section 6-5 of the ITAA 1997”. The problem statement also deals
with the expenses that are allowable as deductions under “section 8-1 of the ITAA 1997”1.
Issues:
The issue to the case study of Kate revolves around the ascertainment of taxable
income derived from personal exertion and allowable deductions that can be claimed for
expenses occurred during the income year under “section 8-1”.
Rule:
“Section 6-5 of the ITAA 1997” is concerned with the income that derived by an
individual taxpayer from the personal exertion or in other words income that is obtained from
personal exertion2. The earnings include of salaries, wages and receipt of gratuity relating to
the services provided in the capacity of employee denotes income from personal exertion
under ordinary or statutory conceptsAs held in the case of “Dean v FCT (1997)” the
retention payment that is made to the employee to continue the employment services for a
period of 12 months after takeover will be held as income.
A person that receives money from prize for participating in an activity will not be
considered as income under the statutory and ordinary concepts. However, winning from
1 Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).
2 Annette Morgan, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013).

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prize money will be held as taxable income given that the money received from prize money
forms the part of taxpayer’s income earning activity. According to the judgement of the court
in the case of “Stone v Federal Commissioner of Taxation (2005)” where the taxpayer was
policeman and javelin thrower. The taxpayer made derived income from salary and also
received sum from endorsement and prize money3. The court held the taxpayer to be carrying
on the business of the professional athlete and the earnings derived was held as taxable
income.
There should be an appropriate association between the receipt and the provision of
services rendered which is the ordinary incident of the provision of services. According to the
judgement of the court in the case of “FCT v Brent (1971)” where the wife of the train
robber was granted an exclusive right by the media company to publish her life story. The
court held that payment received by wife of train robber was the reward for service and will
be regarded as income from personal exertion.
A mere windfall gain could not be characterised as the income. For instance, an
individual receiving money from gambling winnings cannot be held as income except for the
circumstances where the person is carrying on the business of gambling. The court of law in
the case of “Harris v FCT (1980)” has distinguished windfall amount that are received
unexpectedly or infrequently.
A mere prize is not characterized as income. The court of law referring to the
legislation passed in the circumstance of “Moore v Griffiths (1972)” held that mere winning
from prizes was not held as taxable income.
3 Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.

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A gain which is classified as the mere gift cannot be held as carrying the character of
income. An unsolicited gift will not be the part of income of the recipient simply because
generosity was inspired by the goodwill. The judgement of the court of law in “FCT v Hayes
(1956)” where the accountant received shares in the company from the previous owner of
company could not be held as income.
Periodic receipts having the character of income will be held as assessable income.
The judgement held in the case of “FCT v Dixon (1952)” any form of periodic receipts
received by the taxpayer will be held as assessable income4.
A compensation payment received is mostly considered to be capital where a
substantial amount of inconvenience is caused to the structure. A payment is mostly likely to
be considered as the substitute for the lost income when the inconvenience is incidental to the
that form of business. In the event of “Rowe v FCT (1997)” the court of law held that amount
paid as compensation or reimbursement relating to deductible expenditure cannot be regarded
as income under ordinary concepts. The court of law held that payment was not regarded as
“remuneration” but was held as “reparation”.
Application:
The receipt of $90,000 as salary by Kate represents employment remuneration from
the ordinary concept and will be assessable as income. Citing the reference of “Dean v FCT
(1997)” the receipt of salary by Kate is for the services provided in the capacity of employee
and will be income from personal exertion.
4 Braithwaite, Valerie, ed. Taxing democracy: Understanding tax avoidance and evasion.
Routledge, 2017.

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Kate in her spare time participates in high-jumping competitions that led her winning
prize of $60,000 and sports equipment of $20,000 from high-jumping competition. Referring
to “Stone v FCT (2005)” winning from prize money will be held as taxable income under
“section 6-5 of the ITAA 1997” since she regularly participated in such completion in pursuit
of excellence5. Kate carried on the activities of professional athlete and the earnings derived
was held as taxable income. Additionally, the receipt of $20,000 sporting equipment by Kate
will be classified as CGT asset under section 108-5 of the ITAA 1997.
The receipt of $10,000 by Kate had an appropriate relationship between the receipt
and the provision of services rendered which is in the ordinary occurrence of the provision of
services. Citing the reference of “FCT v Brent (1971)” the amount of $10,000 will be
included in the assessable income since it is reward for service that originated from the
personal exertion.
The receipt of $3000 sum from gambling by Kate cannot be held as income in other
words the sum won by Kate is a mere windfall gain that could not be characterised as the
income. By citing the reference of “Harris v FCT (1980)” the amount received by Kate from
gambling is received unexpectedly and did not had regular character of income6.
By referring to the event of “Moore v Griffiths (1972)” the winning of $1000 from
horse competition by Kate at the local ranch is again mere winning from prizes.
5 Cao, Liangyue, et al. "Understanding the economy-wide efficiency and incidence of major
Australian taxes." Canberra: Treasury working paper 2001 (2015).
6 Davis, Angela K., et al. "Do socially responsible firms pay more taxes?." The accounting
review 91.1 (2015): 47-68.

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Consequently, the act of engaging in horse riding by Kate was occasionally and the prize
winning from such competition cannot be held taxable since it lacked an income character.
Kate received a generous gift of $2000 in the Christmas party from her grandparents.
Gain that is categorized as the mere gift cannot be regarded as having the nature of income.
An unsolicited receipt of gift by Kate will not form the part of income simply because
generosity was inspired by her grandparents to gift her. Citing the reference of “FCT v
Hayes (1956)” the receipt of $2000 by Kate could not be held as income since mere gift is
not characterized as taxable income7.
Kate derived a rental income of $20,000 from her rental property in Blue Mountains.
Citing the reference of “Federal Commissioner of Taxation v Dixon (1952)” the receipt of
rental income by Kate is a periodic receipts having the character of income and the same will
be held as assessable income.
As per ATO an individual receiving compensation payment for the loss of profit
making structure is held as capital in nature. Kate rental property was destroyed by the
seasonal bushfire. The compensation payment received by Kate represents a payment that is
mostly likely to be considered as the substitute for the lost income. The payment of insurance
received by Kate is mostly considered to be capital where a substantial amount of loss is
caused to the rental property8. Referring to the judgement of court of law in “Rowe v FCT
(1997)” compensation received for loss of property cannot be regarded as income under
7 Chardon, Toni, Mark Brimble, and Brett Freudenberg. "Tax and superannuation literacy:
Australian and New Zealand perspectives [Part 1]." Taxation Today 102 (2017): 17-25.
8 Cynthia Coleman and Kerrie Sadiq, Principles Of Taxation Law 2013.

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ordinary concepts since the payment cannot be held as “remuneration” but it is classified as
“reparation”.
In compliance with the “section 8-1 of the ITAA 1997” the allowable expenditure of
$40,000 that is reported by Kate will be held as allowable deduction by assuming that the
expenses occurred is for deriving the assessable income.
Conclusion:
Conclusively, the income from salary and rental income will be assessable as ordinary
concepts under “section 6-5 of the ITAA 1997”. Additionally, winning from high-jump and
payment from event hosting will be included in taxable income of Kate. Kate would be
entitled to allowable deductions of $40,000 under “section 8-1 of the ITAA 1997” on
assuming that the expenses were incurred in deriving taxable income.

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Answer to question 2:
Heading:
The current problem is relating to the ascertainment of claiming deductions under
section 8-1 of the ITAA 1997 arising from loss and outgoings that is occurred during the
income year of 2016-17.
Issues:
The issue examines the deduction of expenses such as occurred by Bags Co Ltd and
providing advice on education expenses, travel expenses, conference and equipment cost
under section 8-1 of the ITAA 19979.
Rule:
As held under section 8-1 there are two positive limbs where an individual can claim
deductions from their assessable income any form of loss or outgoing up to the extent when
the expenses is occurred in gaining taxable income or generating taxable income. As held in
“FCT v Ronpibon Tin NL (1949)” expenses that are incidental and relevant will be
considered as allowable deductions given it is incurred in generating taxable income10.
Legal expenditure incurred by the taxpayer to prevent the defamatory statements
would be considered as an allowable deductions section 8-1 of the ITAA 1997. The court in
9 Davison, Mark, Ann Monotti, and Leanne Wiseman. Australian intellectual property law.
Cambridge University Press, 2015.
10 Fry, Martin. "Australian taxation of offshore hubs: an examination of the law on the ability
of Australia to tax economic activity in offshore hubs and the position of the Australian
Taxation Office." The APPEA Journal 57.1 (2017): 49-63.

9TAXATION LAW
the case of “Magna Alloys & Research Pty Ltd (1980)” stated that the company is allowed to
claim deductions for legal expenditure occurred in defending against the defamatory charges
will be considered as allowable deduction11.
As stated under “taxation ruling of TR 93/30” expenditure that is occurred with the
taxpayer home are considered personal or domestic in character and they do not qualify as
allowable deductions for taxpayer under section 8-1. However, an exception to this rule is
that where the portion of home is used for generating income and having the character of
place of business then the expenses incurred such as lease, rent and taxes might be partially
considered for deductions. The court of law in “FCT v Swinford (1984)” allowed the
scriptwriter for claiming deductions relating to the portion of rent paid for the flat where the
taxpayer dedicated a separate room for writing script since the taxpayer did not had separate
business premises.
According to “taxation ruling of TR 98/9” Self-education expenditure incurred to
maintain or increase the skill of taxpayer in occupation where the taxpayer is engaged or
particularly for improving the earning capacity of taxpayer will be considered as allowable
deductions. As held in “Highfield v FCT (1982)” a dentist was allowed to claim allowable
deductions for expenses incurred in course fees, travel and expenses related to Master of
Science in Periodontics12. The court held that expenses were occurred necessarily in
executing the business since the purpose of undertaking the degree was to advance his
practice.
11 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
12 Paul Kenny, Australian Tax 2013 (LexisNexis Butterworths, 2013).

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According to legislative response in section 25-100 of the ITAA 1997 an individual is
allowed to claim an allowable deductions relating to expenses incurred on travelling. As held
in “FCT v Wiener” the teacher was allowed to claim allowable deduction for expenses
incurred on travel between the place of work and home with first and last school attended
every day.
Division 40 of capital allowance provides under section 40-25 (1) that a unit can
claim allowable deduction for amount that are equivalent to decline in value for the income
year of the depreciating asset which is held during the year. Furthermore, division 40-25
allows deductions reduced when the asset decline in value is in respect to its use for the
purpose other than taxable purpose.
Application:
As evident from the case study Bag Co Ltd occurred expenditure on trading stock and
payment of wages to employees. Furthermore, it is noted that Bag Co Ltd also incurred
expenses relating to rent paid to occupy the retail premises in the income year. The expenses
incurred by Bag Co Ltd are occurred under section 8-1 of the positive limbs and a deduction
can be claimed from its assessable income. Citing the reference of “FCT v Ronpibon Tin NL
(1949)” expenses incurred by Bag Co Ltd are incidental and relevant will be considered as
allowable deductions13.
Bag Co Ltd also incurred legal expenses in defending legal actions for misconduct
which can be considered allowable deductions “section 8-1 of the ITAA 1997”14. Citing the
13 Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’
view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.
14 ROBIN & BARKOCZY WOELLNER (STEPHEN & MURPHY, SHIRLEY ET
AL.). AUSTRALIAN TAXATION LAW 2018. OXFORD University Press, 2018.

11TAXATION LAW
reference of “Magna Alloys & Research Pty Ltd (1980)” Bag Co Ltd can claim deductions
for legal expenditure occurred in defending against the misconduct charges up to the extent
they are occurred in gaining the taxable income.
Sally an employee of Bag Co Ltd incurred expenses on lease apartment for
maintaining an office to carry-out the accountancy work. Citing the reference of “FCT v
Swinford (1984)” sally would be allowed to claim allowable deduction for home office
expenses under section 8-1 of the ITAA 199715. Sally later incurred expenses on self-
education expenses for enrolling in Master of professional accounting to advance in her
career. With reference to “Highfield v FCT (1982)” sally will be able to claim allowable
deduction for improving the earning capacity of taxpayer.
Sally occurred travelling expenses on attending chartered accountants conference and
incurs $700 on air travel and $1000 accommodations. The expenses incurred by Sally on
travelling and air accommodations were for improving her income earning capacity and with
reference to “FCT v Wiener” she will be allowed to claim deductions on travelling
expenses16. Sally will be further able to claim capital allowance deductions under section 40-
25 (1) for decline in value of computer equipment in respect to 80% of the work purpose.
Prime Cost Method:
15 R. H Woellner, Australian Taxation Law 2012 (CCH Australia, 2013).
16 Richard E Krever, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013).

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Decline in Value = $10,000 x 365/365 x 100%/5 = 2000
Deductible amount = 2000*80%
Diminishing Value Method:
Decline in Value = 10,000 x 365/365 x 200%/5 = 4000
Deductible amount = 4000 x 80% = 3200
Conclusion:
Conclusively, Bag Co Ltd would be entitled to deductions on trading stock, wages
and rent whereas sally will be entitled to deductions for home office expense, self-education
expense, travel and accommodation expenses under section 8-1 of the ITAA 1997.

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Reference List:
Annette Morgan, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013).
Blakelock, Sarah, and Peter King. "Taxation law: The advance of ATO data
matching." Proctor, The 37.6 (2017): 18.
Braithwaite, Valerie, ed. Taxing democracy: Understanding tax avoidance and evasion.
Routledge, 2017.
Cao, Liangyue, et al. "Understanding the economy-wide efficiency and incidence of major
Australian taxes." Canberra: Treasury working paper 2001 (2015).
Chardon, Toni, Mark Brimble, and Brett Freudenberg. "Tax and superannuation literacy:
Australian and New Zealand perspectives [Part 1]." Taxation Today 102 (2017): 17-25.
Cynthia Coleman and Kerrie Sadiq, Principles Of Taxation Law 2013.
Davis, Angela K., et al. "Do socially responsible firms pay more taxes?." The accounting
review 91.1 (2015): 47-68.
Davison, Mark, Ann Monotti, and Leanne Wiseman. Australian intellectual property law.
Cambridge University Press, 2015.
Fry, Martin. "Australian taxation of offshore hubs: an examination of the law on the ability of
Australia to tax economic activity in offshore hubs and the position of the Australian
Taxation Office." The APPEA Journal 57.1 (2017): 49-63.
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
Paul Kenny, Australian Tax 2013 (LexisNexis Butterworths, 2013).

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R. H Woellner, Australian Taxation Law 2012 (CCH Australia, 2013).
Richard E Krever, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013).
ROBIN & BARKOCZY WOELLNER (STEPHEN & MURPHY, SHIRLEY ET
AL.). AUSTRALIAN TAXATION LAW 2018. OXFORD University Press, 2018.
Saad, Natrah. "Tax knowledge, tax complexity and tax compliance: Taxpayers’
view." Procedia-Social and Behavioral Sciences 109 (2014): 1069-1075.
Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).